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Monday, 27 April 2015

How to Follow the Trend for your Time Frame

Basic Trading Concepts Defined

The call to "follow the trend!" is not something new. The logic is solid.

Markets that are trending tend to continue for some time in that direction. So by trading in the direction of the predominant trend, you immediately increase the probability for profit by some measure.

However, when it comes to market trends, it is all relative. For example, you could look at a monthly price chart and see that the trend is currently bullish. Yet, if you look at a daily chart, it could be in a very strong bear trend.

Therefore, what is the trend? Is it bullish or is it bearish?

At any given time, the trend will be both bullish and bearish, depending on the time-frame being monitored.

So how do you trade with the trend if several time-frames are in a bull trend and several time-frames are in a bear trend?

Time Frame

The best way to trade trends is to decide first on the time-frame you want to use for your entry and exit decisions.

For example, if you want to enter and exit trades based on the daily time-frame chart, you should then determine the trend using either a 3-day chart (where each price bar is made up of 3 trading days) or a weekly chart (where each price bar is made up of a price bar is made up of a complete week, Monday to Friday).

Use the weekly chart to determine whether weekly prices are in a bullish or bearish phase, then only trade in that direction using the daily price chart.

I have left off specifics about trend determination or entry/exit signals because that is for another lesson.

Suppose that you want to enter and exit trade signals based on a 10-minute or 15-minute chart. You might want to use the 60-minute chart to determine your trend first.

Roughly, whatever time-frame you decide to use as your trade entry/exit time-frame, look at a time-frame that is 3-6 times greater for your trend and only take trade signals that get you in with that trend.

The time-frame you choose to trade from should be based first on how much risk you can initially handle per trade. If you have a large account, you can handle the risk associated with trading the higher-time frames.

Those with smaller accounts will naturally need to stick with lower-time frames in order to minimize risk exposure. Once you have this decided, use the formula suggested above to pick the higher-time frame to base your trend on.

Avoid trading against the trend of the time-frame chosen for trend determination and you will improve your probability for trading success.